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Depending on how you look at it, they’re either doubling down on brick and mortar or waving the white flag on their core business… Video rental chain Blockbuster (NYSE: BBI) says it has made a $6 per share all-cash buyout offer for electronics retailer Circuit City, but that its efforts heretofore have been rebuffed. The price, which comes to over $1 billion, represents a 54 percent premium to Friday’s close of $3.90. Blockbuster says it first sent a letter to Circuit City boss Philip Schoonover back in mid-February, outlining the rationale for the deal, but that since then it hasn’t been given the opportunity to conduct necessary due diligence. The letter also noted that Blockbuster could conceivably go as high as $8 per share for the offer, pending the opportunity to analyze Circuit City in greater depth.

In a statement, Blockbuster touts the opportunity for the combined company to take advantage of the “growing convergence of media content and electronic devices”, while also reducing cost savings. Reducing store footprint could be the big play here. It was recently reported that Blockbuster was interested in a set-top box offering, a la Netflix (NSDQ: NFLX), but to some extent, Blockbuster has retrenched from direct competition with Netflix, opting instead to get the most out of its physical locations. Were the rental giant to merge with the consumer electronics chain, it would mark a significant moment in the death of the standalone video rental store. The big box electronics retailers are already in the DVD selling business, so for Circuit City, this would let them rent out discs as well. More in extended entry…

The company included a copy of the letter it sent to Circuit City back in February, which notes that the offer would be financed via the issuance of more Blockbuster shares, since the weak credit conditions would make debt finance impossible. Blockbuster states in the release that its first quarter will come in at a profit of $30 million, rather than a loss of $49 million in the year-ago period, as argument that its turnaround efforts are well under way and that Circuit City would be well-advised to hop on board.

Update: Circuit City’s response: basically that it’s seen the offer and has a number of questions, but that it is evaluating the proposal. The statement specifically questions how Blockbuster proposes to finance the offering. Release.

Conference call: Blockbuster CEO Jim Keyes started off the conference call by stating that the company has been patient since its initial offer two months ago, but that the time had come to take the offer directly to shareholders. He noted that the offer had the support of major Blockbuster shareholders, including Carl Icahn, the company’s largest shareholders. As for the strategic plan, Blockbuster envisions two kinds of stores: smaller Blockbuster stores that offer new consumer electronics products, as well as larger Circuit City locations that offer various media services. But, to some extent there would be a “rationalization” of the combined company’s real estate portfolio, meaning some stores would be shut down. “It’s not inconceivable to imagine a Blockbuster rental kiosk in a Circuit City store.”

During the Q&A, the company was asked how this acquisition should be understood in the context of Blockbuster’s digital investments, in areas like downloads and set top boxes. Take this for what you will, but Keyes argued that it’s all a natural fit: “What this combination provides is the ultimate distributions for this digital content.” The company envisions Circuit City selling subscription media services as an upsell for the electronics they sell. Keyes cited Apple (NSDQ: AAPL) as the leader in the convergence of digital content with electronics, and now Blockbuster wants its cut: “We want to capture this opportunity while this wide open.. If we don’t move now, we run the risk of getting left in the dust.”

— Bottom line: Blockbuster is portraying this combination as a high-concept deal (the kind of deal that markets and analysts tend to hate), allowing all kinds of innovation on the retail end. Keyes mentioned all kinds of new opportunities, like Coca-Cola bar in the stores a la Starbucks locations in Barnes & Nobles (seriously), special sections just for kids and kiosks Analysts kept asking about the real estate synergies, perhaps suspecting that this had to be the real reason for the deal, since the stated rationale seemed so hard to grasp. But Keyes & Co. wouldn’t bite. While they talked about real estate rationalization as an opportunity, they tried to make this out to be much more than just eliminating duplicative locations. Even if Circuit City responds favorably to the latest overtures this is going to be a very tough sell to Wall St.